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Cardinal Health last year delivered almost $2 billion a week worth of drugs and medical supplies to retail pharmacies, hospitals, and surgery centers—everything from generic statins at the low end to branded cancer drugs at the high. And often it's the cheapest drugs that deliver the highest profit margins.

Independent pharmacies typically ask Cardinal to select the most effective generic drug in a particular category. "We can aggregate demand across many different independent pharmacies, buy at scale, and provide economic benefit," says Barrett.

The customer gets a low-priced drug, and everybody makes money along the way. With proprietary compounds, virtually all of the profit accrues to the drug maker. But with generics, the distributor typically earns gross margins of around 18%, compared with less than 2% for a branded drug, according Pembroke Consulting. And there's still some margin left over for the pharmacy.

"We've got some public-health issues that we really have to wrestle to the
ground as a society,"
Stephen Webster for Barron's

In other words, everybody wins—except the big pharma companies. And that trend will continue. "Today about 70% of all prescriptions in the U.S. are filled generically," says Barrett. "That could reach 80% over the next year."

Barrett, 57, not surprisingly has strong views about the state of health care in America, and they have little to do with whether the Supreme Court upholds Obamacare this month or strikes it down.

"We have an economy that will not tolerate health care accelerating at the same rate that it has been accelerating for the past couple of decades," he says. The nation's aging population "is suffering from chronic illness in a system that was really built to treat acute illness."

Increasingly, he goes on, care will be delivered through a dispersed network, such as ambulatory centers and other outpatient facilities, rather than hospitals, which are far more expensive and not always the most effective. And that's an opportunity for Cardinal, he says: "We always had a huge presence in the hospitals and the pharmacies, but we've been growing our presence in the ambulatory settings."

Energetic and fit, Barrett sat down with Barron's in a conference room at the company's Dublin, Ohio, headquarters over a lunch of green salad. No sodas, and no sweets for dessert. And that was no accident. While Cardinal's business is built around treating diseases with increasingly low-cost medicines, Barrett knows the real key to cutting health-care spending is to treat the problem before it becomes a problem: "The starting point is the really devastating effect of obesity and smoking on public health."

"We've got some public-health issues that we really have to wrestle to the ground as a society," he says. The combination of preventable diseases and demographics, he continues, are "really a huge driver of cost."

THE CEO OF THE COUNTRY'S second-largest drug distributor—
McKessonmck 2.030138133110088%McKesson Corp.U.S.: NYSEUSD146.25
2.912.030138133110088%
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2268072AFTER HOURSUSD145
-1.25-0.8547008547008547%
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36829
P/E Ratio
16.55591654686032Market Cap
32407310556.9324
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0.7658119658119659% Rev. per Employee
2856870More quote details and news »mckinYour ValueYour ChangeShort position
(MCK) is marginally bigger—is neither a doctor nor an engineer. Barrett, in fact, earned an undergraduate degree in music and history from Brown University in 1977. And after an audition, he was invited to study with a voice coach who worked with New York's Metropolitan Opera.

Barrett's predisposition to the arts—he's also an accomplished pianist, guitarist, and French-horn player—comes naturally. His mother is a published poet and former teacher and his father was a psychologist. Nobody in his family worked in business, so it was never really on his radar screen.

A varsity soccer player at Brown, he followed his passions after college, teaching and coaching at two of New York's private schools by day while pursuing a music career at night. Soon, he started landing folk-rock gigs around town—but something seemed to be missing.

"I realized, about two and a half years into this, that while I loved being onstage and I loved being in the recording studio and I loved the music, everything else about the business I didn't like," he says. "I didn't like turning day into night, night into day." Nor did he care for the pay—it didn't cover his rent.

It was then that his fiance's father steered him into business, working for a small dermatology-related firm.

"I really enjoyed the variety of it and how fast I was getting a chance to learn," Barrett says, recalling that he moved between regulatory affairs, sales, and manufacturing, among other responsibilities. Eight years later, after earning an M.B.A. from New York University in his spare time, he was running the firm.

After turning around a troubled unit in a larger health-care firm and a stint at a medical start-up, Barrett joined generic-drug powerhouse Teva Pharmaceutical in 1999, overseeing the Israeli company's U.S. operations and later all of North America—by far the company's most important markets.

In 2006, he was offered the CEO spot at Teva, but turned down moving to a city near Tel Aviv for family reasons.

"I totally understood why Teva at the time really needed to stay headquartered in Israel, and I respected that it was and remains a national treasure," he says.

Soon after he was recruited to Cardinal and was named CEO in 2009.

It was an impressive move up the ladder for a music major, and early on he viewed his liberal-arts background as a deficiency. But over time, he says, "I came to look at it as a source of strength." His broad education, he says, helps "to make sure I'm looking at root causes of issues and looking holistically at whatever is in front of us."

His approach has paid off handsomely: Cardinal's stock has produced annualized total returns of 21% since Barrett took over, versus 13% for the broad market.

THREE YEARS AGO, in one of his boldest moves, Barrett spun off
CareFusion
(CFN), then a $4.5 billion in revenue maker of clinical and medical products, including IV pumps, electronic infection-surveillance systems, and surgical instruments. "I really like the product business," Barrett says. "That is familiar turf for me." But the two businesses were fighting for capital, and the distribution units, he says, "had started to atrophy a bit."

So-called bulk sales to the big chains are by definition a low-margin business, but they give the company tremendous purchasing power. That, in turn, gives them a cost advantage with smaller, more lucrative customers, in particular independent pharmacies, clinics, ambulatory centers, and specialty hospitals.

Sales of laboratory and surgical supplies, like surgical-gown and surgical kits that are customized for specific procedures, are also giving margins a boost. They comprise about 10% of total sales.

Add in the growth from higher-margin generic drugs, and Cardinal's razor-thin operating-profit margins have fattened to an expected 1.74% in the fiscal year ending this month. That's up from 1.53% last year and 1.39% in fiscal 2010.

International operations are another growth engine, from a very small base. Overseas business now accounts for 1.5% of revenue and looks to be heading higher, thanks to a brisk pace of acquisition.

That growth will continue. In late 2010, Cardinal paid $458 million for Yong Yu, now Cardinal Health China, which for now mostly focuses on prescription drugs. "Our pharmaceutical partners and our medical-device partners wanted their products in China; it was a high priority for them," says Barrett.

Cardinal doesn't just ship pills to retail pharmacies. It also handles specialty pharmaceuticals, which are a lot more expensive and are used to treat more complex diseases like cancer. Often delivered in injectable form, these drugs, such as Xalkori (for lung cancer) or Provenge (prostate cancer), are typically administered in a physician's office. They can cost the patient $50,000 to $100,000 a year.

Among the logistical challenges for shipping these drugs, which typically cater to small populations, is that they require refrigeration, often in coolers or gel paks. The rewards for Cardinal: profit margins significantly higher than those for serving the likes of CVS.

Now a relatively small player in this market, the company is working actively to boost the business. In 2010, Barrett snapped up Healthcare Solutions Holdings, a key partner of speciality-drug players.

To make further inroads, Barrett says he's been hiring "many, many" more physicians to develop greater clinical know-how as an institution.

IN THE YEARS AHEAD, look for Barrett to push further into distribution of nuclear medicine, including chemical agents used in the booming field of medical imaging.

"Distribution is a huge anchor activity of what we do, but building on the distribution is sets of services," he says. Barrett is eyeing consulting services to help independent drugstores boost their businesses and to show oncology practices how to operate more efficiently.

"What has happened in many oncology practices," he says, "is that each physician, having been trained as an individual practitioner, uses his or her own approach to manage the patient—all based on good medicine. But, actually, if you studied the data collectively, you'd see patterns that would encourage you toward a more standardized protocol." The goal, he says, is "better outcomes at less cost."

Barrett is determined to make businesses like that pay off; they boost both revenue and margins. "Although we are extremely good at the logistical part of the business—it's really our core competence—building a service component is critical," he says.

If he pulls it off, Cardinal could be the picture of health for years to come.